The White House conference has been held each decade since the 1960s to identify and advance actions to improve the quality of life of older Americans. The 2015 White House Conference on Aging is an opportunity to look ahead to the issues that will help shape the landscape for older Americans for the next decade.

A series of regional conferences have been held around the country in recent months to generate input and feedback from Americans about how to shape the aging policy landscape, leading up the White House event next week. The July 13, 2015 White House Conference on Aging marks the 50th anniversary of Medicare, Medicaid, and the Older Americans Act, as well as the 80th anniversary of Social Security.

The Government Accountability Office’s new retirement analysis reviewed nine studies conducted between 2006 and 2015 by a variety of organizations and concluded that generally one-third to two-thirds of workers are at risk of falling short of their retirement savings targets.

However, many of these studies use a “replacement rate” standard: Most commonly, this analysis concludes that you need to replace 70–80 percent of your preretirement income to be assured of a successful retirement. This is a convenient metric to use to convey retirement targets to individuals—and no doubt provides useful information to many workers who are attempting to determine whether they are “on-track” with respect to their retirement savings and/or what their future savings rates should be. However, replacement rates are NOT appropriate in large-scale policy models for determining whether an individual will run short of money in retirement. Why?

Because simply setting a target replacement rate at retirement age and suggesting that anyone above that threshold will have a “successful” retirement completely ignores:

Longevity risk.

Post-retirement investment risk.

Long-term care risk.

In fact, looking at just the first two risks above, if you use a replacement rate threshold based on average longevity and average rate of return, you will, in essence, have a savings target that will prove to be insufficient about 50 percent of the time. Of course, this would not be a problem if retirees annuitized all or a large percentage of their defined contribution and IRA balances at retirement age; but the data suggest that only a small percentage of retirees do this.

In contrast, EBRI has been working for the last 14 years to develop a far more inclusive, sophisticated, realistic—and, yes, complex—model that deals with all these risks. It’s our Retirement Security Projection Model® (RSPM), and produces a Retirement Readiness Rating (basically, the probability that a household will NOT run short of money in retirement).

Our most recent Retirement Readiness Ratings by age are shown in Figure 1 (left). Our baseline results do include long term care costs (the red bars), but we also run the numbers assuming that these costs are NEVER paid by the retirees (the green bars). This latter assumption is not likely to be realistic for many retirees, but we include it to show how important it is to include these costs (unlike many other models).

Even more important is Fig. 2 (right), which shows Retirement Readiness Ratings as a function of preretirement income AND the number of future years of eligibility for a defined contribution plan for Gen Xers.

Even controlling for the impact of income on the probability of a successful retirement, the number of future years that a Gen Xer works for an employer that sponsors a defined contribution plan will make a tremendous difference in their Retirement Readiness Ratings (even with long-term care costs included).

The evidence from EBRI’s simulation modeling certainly agrees with the GAO that a significant percentage of households will likely run short of money in retirement if coverage is not increased. However this is because we model all the major risks in retirement and do not simply assume some ad-hoc replacement rate threshold.

Moreover, using an aggregate number to portray the percentage of workers at risk for inadequate retirement income is really missing the bigger picture. The retirement security landscape for today’s workers can be bifurcated into those fortunate enough to work for employers that sponsor retirement plans for a majority of their careers vs. those who do not. In general, those who have an employer-sponsored retirement plan for most of their working careers appear to be well on their way to a secure retirement.

Perhaps the focus of any retirement security reform going forward needs to be on those who do not work for employers offering retirement plans and those in the lowest-income quartile.

—————————————————————————

Jack VanDerhei is research director at the Employee Benefit Research Institute.

This week marks the 40th Labor Day since President Ford signed the Employee Retirement Income Security Act of 1974 into law. ERISA has been amended many times since then—as have Internal Revenue Code provisions that relate to ERISA-covered employee benefit plans. Private-sector regulatory change has come as well, via the Financial Accounting Standards Board. The U.S. and global economies, trade and employment have changed continuously over this 40 years, as has the general societal view of individual responsibility

I will leave to others conclusions on why things have gone as they have, but will provide four data pictures of the 40 years of ERISA—and by coincidence, my entire career in the benefits world—which has revolved around ERISA and employee benefits.

Chart 1

Chart 1 shows income sources in 1975 as reported by the Current Population Survey. Many describe the 70’s and earlier as the “good old days” for retirement: 25% of those over 65 in 1975 reported pension income. Some had both private and public pension income, with 16.9% reporting private pension income and 8.2% reporting public pension income. A central intent of ERISA was to increase the number of workers who would have private pension income in the future.

This was to be accomplished with new standards for retirement plan participation and vesting that would increase the number of plans in which workers would participate, and to increase the number of workers who would gain a non-forfeitable right to a benefit. Chart 2 shows that sponsorship has steadily increased, that participation as a percent of all workers has not, but that the increase in workers with non-forfeitable benefit rights has been achieved.

Chart 2

Research undertaken by EBRI since 1978 documents the change. Today our unique databases and our Retirement Security Projection Model® and the EBRI Retirement Readiness Rating™ it produces indicate that the financial well-being delivered by the voluntary private-sector system will continue to provide significant supplementation to Social Security in the decades ahead (unless legislative or regulatory changes or economic changes that cannot be predicted tear things apart).

Why have the ERISA (and amendments) vesting rules made such a difference? Because of short job tenure: Most U.S workers have never worked long careers with one employer (or in one industry that might have a multi-employer plan). Chart 3 shows that median labor force tenure has changed little for workers under the age of 44 over the life of ERISA. It has shortened a bit more for workers 46‒54, and significantly for workers 55‒64, such that the vesting standards in ERISA have been exceedingly important.

Chart 3

Chart 4 shows from 1983 forward (data collection has become more robust over time), that among public- and private-sector workers 45-64 the percentage with 25 or more years of tenure in both sectors is quite low, with nearly 4/5ths of the population experiencing tenures that are less than a “full career” with one employer. Data in Chart 5 on long tenure can be examined by sector, and shows that public-sector workers have significantly more full careers with one employer than is true in the private sector.

Chart 4

ERISA at 40—What we know as facts is that:

♦ There are about 700,000 plans today as compared to 300,000 when ERISA was enacted.

♦ The proportion of workers who are active retirement plan participants has increased from under 40 million to over 85 million, and that it is about the same proportion of the workforce as it was in 1975.

♦ The proportion of participants gaining vested benefits has more than doubled, as vesting periods have grown shorter, with 46% of workers participating and 43% of workers having vested rights.

♦ We know that total plan assets, average plan assets by various demographics, the proportion of those over 65 with income and/or accumulated wealth that is attributable to their prior vested participation in ERISA plans has grown every year. And it continues to grow, according to data from the IRS, the Federal Reserve, the Department of Commerce Income and Product Accounts, the Department of Commerce Bureau of the Census, and administrative data of plans themselves.

♦ And we know that the PBGC is paying benefits to millions of retirees because this ERISA-created agency exists.

Chart 5

There is no way to know where we would be had ERISA never been enacted, but data clearly tells us where we were and where we are.

These advancements in the financial well-being of retirees and future retirees are the legacy of a voluntary system that has flexed with changes in the economy, with workforce changes, working alongside Social Security, and other in-kind income and benefit programs from the government, and from other voluntary programs. OECD, World Bank, and other international comparisons document that the post-ERISA U.S. system is one of the best-funded and most stable in the world, when judged against voluntary programs working in combination with annuity-paying public social insurance programs elsewhere. Comparisons to other nations with only mandatory programs produce a less favorable picture when looking at the issue of retirement narrowly, but looking more broadly at the overall economic state of nations and populations, the U.S. retirement system certainly ranks near the top of the heap.

Younger persons than I will have to write about ERISA at 80, but I hope to still be writing about it at 50 and 60. If I live a year longer than my parents, I will even write a perspective in 2044, as I celebrate the beginning of my 95th year—and ERISA marks birthday 70. Stay tuned.

Note: To read more about ERISA at 40, see this PlanSponsor interview, online here.

At EBRI’s 35th anniversary policy forum last December, it occurred to me that one of the youngest minds in the room happened to belong to the oldest panelist we had invited. Arnold Brown, 87 when he spoke at our forum, was nationally renowned not only for his insightful observations about the future, but his often surprising predictions of how the American labor force—and the employment-based benefits on which they depend—might change in response. How fitting that the forum panel on which he participated was titled “The Road to Tomorrow.”¹

So I was especially saddened to hear of his recent passing, shortly before his 88th birthday. He died surrounded by family, who described him as “brilliant, witty, wise and generous.” Having followed him and his work closely in my own career, I would agree with all that and more.

At a time when news reports warn of the “technological divide” between the young and the old in this country, Brown’s specialty was using hard data to help us understand why and how technology is changing our lives. Ironically for a tech-head, he started out as an English major (he graduated with honors from UCLA), before going on to serve in the Navy.

Arnold Brown

His big break on the national stage came when he was vice-chairman of the American Council of Life Insurers, where in 1969 he created ACLI’s Trend Analysis Program. This was the first, and considered among the best, “environmental scanning programs” that focused on long-range business planning and strategy. In 1977, he formed his own company, Weiner, Edrich, Brown, Inc., consultants in strategic planning and the management of change, where many of the biggest companies in the world would become clients. Not surprisingly, he served as board chairman of the World Future Society.

Much of his recent work focused on the trend toward “deskilled workers,” as more and more employers turn to computers, software, and robots to replace both blue-collar and white-collar human employees. He pointed out the many ripple effects that is already having and will have going forward, especially on state and federal social insurance programs that depend on taxes drawn from employment payrolls to survive. As workers are increasingly replaced by robots, Brown asked at the EBRI forum, “Should we require employers of robots to pay Social Security for them?”

Among his other thought-provoking, data-driven points at the EBRI forum:

The prolonged recession has masked what he called a “profound transformation of the economy” driven by automation, one that has to do with the very nature of work and jobs as the nation moves into the future. In 2012, he noted, approximately 85 percent of robots were purchased were for manufacturing purposes, and within the next few years 30 percent or more of robots will be for non-manufacturing, white-collar use.

Part-time, contract, and temporary workers are becoming the norm worldwide. Brown noted that in France in 2012, 82 percent of the new jobs created were temporary, and in Germany, what are referred to as “mini jobs” (low-paid, short-term jobs) now comprise 20 percent of all jobs in that economy. Another aspect of this job trend: Of the 16-to-25-year-old cohort not currently in school, barely a third (36 percent) have full-time jobs, and a major reason for this is new technology (such as 3-D printing), he said.

The upshot is that “The old model of the contract between employer and employee is increasingly obsolete,” Brown said at the EBRI forum, and “more and more, we will need a new model of what the relationship will be between the employer and the employee.” Over the next 35 years, he predicted, there will evolve “an entirely different, unprecedented relationship in the workplace between employers and employees, and what the consequences of that will be are really very profound in terms of what your businesses will be facing.”

Professionally, I greatly admired his acute use of data to make highly informed analysis about the future. Personally, I deeply admired how someone almost in his 90s lived so much in the future.

In Washington, there is naturally great attention given to how federal law (particularly tax law) and regulation affect business and employee benefits. But Arnold Brown’s focus was elsewhere: How the economy—and the underlying technology and skills that drive it—affect not only the business world, but society as a whole, faster and far more powerfully than even government policy.

His keen mind and often accurate predictions will be missed.

Notes

¹ The complete report on the EBRI 35th anniversary policy forum, “Employee Benefits: Today, Tomorrow, and Yesterday,” is published in the July EBRI Issue Brief and is online here.

I joined EBRI with a passion for the insights that quality research can provide, and a modest concern about the dangers that inaccurate, sloppy, and/or poorly constructed methodologies and the flawed conclusions and recommendations they support can wreak on policy decisions. While my tenure here has only served to increase my passion for the former, on (too) many occasions I have been struck not only by the breadth of assumptions made in employee benefit research, but just how difficult – though not impossible – it is for a non-researcher to discern those particulars.

We have over the past couple of years devoted some of this space to highlighting some of the most egregious instances, but as I close this chapter of my professional career, I wanted to share with you a “top 10” list of things I have learned in my search to find reliable, objective, actionable research:

There are always assumptions in research; find out what they are. Garbage in, garbage out, after all (the harder you have to look, the more suspicious you should be).

Just because research validates your sense of reality doesn’t make it “right.” But just because it invalidates your sense of reality doesn’t necessarily make it right, either.

Take the conclusions of sponsored research with a grain of salt.

Self-reported data can tell you what the individual thinks they have, but not necessarily what they actually have.

There’s a certain irony that those who propose massive changes in plan design, policy, or tax treatment, frequently assume no behavioral changes in response.

When it comes to research findings, “directionally accurate” is an oxymoron.

In assessing conclusions or recommendations, it’s important to know the difference between partisan, bipartisan and nonpartisan.

In an employment-based benefits system, the ability to accurately gauge employee response to benefits change is dependent on the reaction of the employers who provide access to those benefits.

One of the things that I’ve always loved about the field of employee benefits was that there was always something new to learn, and with each position along the way I have gained a new and fresh perspective. I’ll always treasure my time here as a member of the EBRI team, the opportunity I’ve had to contribute to this body of work – and I’m looking forward to continuing to draw on EBRI research for insights and analysis in my new position, as I have for most of my professional career.

That said, I’ll close by commending to your attention one of my favorite “lessons” – a quote attributed to Mark Twain, and one worth keeping in mind along with the 10 “lessons” above:

“It’s easier to fool people than to convince them they have been fooled.”

A few months back, I was intrigued to catch several episodes of “Cosmos,” an updated version of the classic 1980 Carl Sagan series. Along with the significantly expanded and enhanced visuals and (to me, anyway, generally annoying) animations, the series recounted the work, travails and accomplishments of Edmond Halley, who, even today, is probably best remembered for the comet whose 75-year cycle he identified and which still, as Halley’s Comet, bears his name.

Halley wasn’t the first to see the comet, of course – in fact, it had been recorded by Chinese astronomers as far back as 240 BC, noted subsequently in Babylonian records, and perhaps most famously shortly before the 1066 invasion of England by William the Conqueror (who claimed the comet’s appearance foretold his success). Halley noted appearances by the comet in 1531, 1607 and 1682, and based on those prior observations – and the application of the work and mathematical formulas of his friend Isaac Newton – predicted the return of the comet in 1758, which it did, albeit 16 years after his death in 1742.

Of course, the importance of repeated, measured observations isn’t restricted to celestial phenomena. Consider that individual retirement accounts (IRAs) currently represent about a quarter of the nation’s retirement assets; and yet, despite an ongoing focus on the accumulations in defined benefit (pension) and 401(k) plans that have, via rollovers, fueled a significant amount of this growth, a detailed understanding as to how these funds are actually used during retirement has, to date, not been as well understood.

To address this knowledge shortfall, the Employee Benefit Research Institute has developed the EBRI IRA Database, which includes a wealth of data on IRAs including withdrawals or distributions, both by calendar year and longitudinally, which provides a unique ability to analyze a large cross-sectional segment of this vital retirement savings component, both at a point in time and as the individual ages and either changes jobs or retires. Indeed, as a recent EBRI publication notes, the rate of withdrawals from these IRAs is important in determining the likelihood of having sufficient funds for the duration of an individual’s life, certainly where these balances are a primary source of post-retirement income.

Previous EBRI reports[i] have explored this activity for particular points in time, but a recent EBRI analysis[ii] looked for trends in the withdrawal patterns of a longitudinal three-year sample of individual post-retirement withdrawal activity, specifically those age 70 or older (in 2010), the point at which individuals are required by law to begin withdrawing money from their IRAS.

The EBRI analysis concluded that, when looking at the withdrawal rates for those ages 70 or older, the median of the average withdrawal rates over a three-year period indicated that most individuals are withdrawing at a rate that not only approximates what they are required by law to withdraw, but at a rate that is likely to be able to sustain some level of post-retirement income from IRAs as the individual continues to age.

Furthermore, the report notes that an examination of these trends over this period suggests that, based on the resulting distribution of average withdrawal rates over time as a function of the initial-year withdrawal rate, the initial withdrawal rate for those in this age group appeared to be one that these individuals are likely to continue to make the next year.

Of course, while the median withdrawal rates suggest many individuals would be able to maintain the IRA as an ongoing source of income throughout retirement, further study is needed to see if these individuals are maintaining those withdrawal rates over longer periods of time. Moreover, the integration of IRA data with data from employment-based defined contribution retirement accounts currently underway as part of initiatives associated with EBRI’s Center for Research on Retirement Income (CRI) will allow for an even more comprehensive picture of what those who may have multiple types of retirement accounts do as they age through retirement.

And we won’t have to wait 75 years to see how it turns out.

Notes

[i] See “IRA Withdrawals, 2011” online here. See also ““Take it or Leave it? The Disposition of DC Accounts: Who Rolls Over into an IRA? Who Leaves Money in the Plan and Who Withdraws Cash?” online here.

Categories

Categories

Search for:

Welcome!

It is my pleasure to welcome you to the blog of the Employee Benefit Research Institute (www.ebri.org). Periodic postings will serve to supplement our regular publications, and allow us to provide comment on questions that we get from news reporters, policymakers, and others.

By necessity, the blog will be closed to comment, since we do not have the resources to constantly monitor and manage two-way dialogue. However, we welcome your feedback—positive or negative—through an e-mail to ebriblog@ebri.org